Fried Facts on Federal Reserve Interest Rates

Here are some fried (quick, hot, and crispy) facts about interest rates and the Federal Reserve (Fed):

🔥 1. The Fed Controls Short-Term Rates, Not Long-Term

The Fed sets the federal funds rate (overnight lending rate between banks), influencing short-term borrowing costs.

Long-term rates (like mortgages) are driven by market forces, inflation expectations, and investor demand.

📉 2. Negative Rates Are a Thing (But Not in the U.S.)

Some central banks (like the ECB and Bank of Japan) have used negative interest rates to boost spending.

The Fed has never gone negative, though it was considered during the 2020 crisis.

💸 3. Higher Rates = Stronger Dollar (Usually)

When the Fed hikes rates, the U.S. dollar often strengthens because higher yields attract foreign investors.

But if hikes cause a recession, the dollar could weaken due to economic fears.

🏦 4. The Fed Doesn’t 'Print Money' Directly

The Fed influences money supply via open market operations (buying/selling Treasury bonds).

Quantitative Easing (QE) = Buying bonds to inject cash into the economy (lowering long-term rates).

Quantitative Tightening (QT) = Selling bonds to pull money out (raising long-term rates).

📊 5. The Fed’s 2% Inflation Target Isn’t Set in Stone

The Fed aims for 2% inflation as a sign of a healthy economy.

In 2020, they shifted to 'average inflation targeting', meaning they’ll allow inflation to run above 2% to make up for past low inflation.

🚨 6. Rapid Rate Hikes Can Trigger a Recession

The Fed’s aggressive hikes in the early 1980s (under Paul Volcker) caused a severe recession but killed inflation.

The 2022-2023 hikes were the fastest since the ’80s, raising fears of a 'hard landing.'

📉 7. The Fed Pays Banks to Hold Cash (IORB)

Since 2008, the Fed pays banks interest on reserve balances (IORB) to help control the money supply.

This rate helps set a floor for short-term interest rates.

🤔 8. The Stock Market Hates Uncertainty More Than Rate Hikes

Markets often panic before hikes but stabilize if the Fed signals a clear path.

Unexpected hikes or pauses cause bigger swings than predictable moves.

🎯 9. The 'Neutral Rate' Is a Mystery

The neutral rate (r*) is the theoretical rate that neither boosts nor slows the economy.

No one knows exactly what it is—estimates keep shifting!

💡 10. The Fed Doesn’t Set Your Mortgage Rate

Mortgage rates track the 10-year Treasury yield, not the Fed’s rate.

But Fed policy indirectly affects them by shaping investor expectations.

BONUS: The Fed’s Dual Mandate

The Fed’s two main jobs: Maximum employment Stable prices (inflation control). Sometimes these goals conflict!

Want more deep-fried econ? 🍗 Let me know which part to crisp up!

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